Default Rate In U.S. Falls To 2.9% In Second Quarter – Moody’s

By Michael Aneiro

While their bond funds were getting battered by interest-rate riskin the second quarter, at least investors didn’t need to worry much about credit risk, as junk-rated companies continued to default at a rate well below historical averages. Moody’s Investors Service reports today that the U.S. speculative-grade default rate slipped to 2.9% in the second quarter from 3.0% in the first and 3.3% a year ago. Globally, the rate did rise a bit, with the the trailing 12-month default rate hitting 2.8% in the second quarter, up from 2.5% in the first quarter but down from 3.1% in the same period last year, largely because the European default rate rose to 3.4% in the second quarter from 2.1% in the first, which is still down from 3.6% this time last year.

“Defaults remain stable, but are expected to increase slightly,” notes Albert Metz, director of Moody’s credit policy research. “Easy liquidity has of course kept the default rate low for some time. If funding becomes tighter we would expect an increase in the incidence of default.”

Moody’s forecasts the global rate to rise to 3.2% by the end of this year before falling again to 2.7% by the end of the second quarter next year. Across industries, Moody’s expects default rates to be highest in the Media: Advertising, Printing & Publishing sector in the U.S. and the Hotel, Gaming & Leisure sector in Europe 12 months down the road.

Moody’s distressed index, which measures the percentage of high-yield issuers whose debt is trading at distressed levels, came in at 9.1% in the second quarter, up from 8.8% in the first but down a lot from 19.5% at this time last year.

Moody’s says the U.S. leveraged loan default rate ended the second quarter at 2.3%, down from 3.0% in the first but up from 2.6% a year ago.

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JULY 11, 2013 2:36 P.M.

H. Craig Bradley wrote:

JUNK BOND FUNDS ARE "INDIAN GIVERS"

"High Yield" (good marketing) or Junk Bond funds at first give handsome returns until the tide changes and then they take back much of what they gave to investors. So, especially with this asset class, the best strategy is too sell when they peak-out and take your chips completely off the board. If you hang on too long, then the odds catch-up with you as increasing defaults erode your paper gains.